'Worse than Masters' - Wesfarmers' British Bunnings nightmare deepens

Retail giant Wesfarmers' credibility has been damaged in the wake of the home improvement disaster unfolding in Great Britain and Ireland, which some analysts are now describing as even worse than Woolworths' Masters debacle.

Wesfarmers on Monday wrote off $1 billion the value of its Bunnings UK and Ireland (BUKI) business due to worse than expected trading at the Homebase chain it bought for $705 million in 2016 and at the 19 Bunnings format stores it has opened.

The conglomerate, which also owns Coles, Kmart, Target and Officeworks, forecast deeper losses from the investment and confessed that much of the pain was "self-inflicted", having removed some popular products and failing to stock others.

John Sevior from Airlie Fund Management, which owns several hundred million dollars worth of Wesfarmers shares, said the BUKI situation was “incredibly disappointing, but not at all surprising".

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Mr Sevior said the project always had a low probability of succeeding and that its unravelling had called Wesfarmers' credibility into question.

“Wesfarmers pride themselves at being 'superior capital allocators' and I’m not sure a lot of the decisions they’ve made in recent times would support that," he said.

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“What is most disappointing for shareholders is that the three architects of the acquisition and the whole idea ... aren’t even at the company."

Chief executive at the time of the deal Richard Goyder handed over the Rob Scott in November, chief financial officer Terry Bowen left the company at the same time, and Bunnings boss John Gillam resigned in December 2016.

Airlie's John Sevior said the BUKI situation was “incredibly disappointing, but not at all surprising". Photo: Rob Homer

“It was a decent-sized bet, low probability and they’re not around to be accountable for it which I just find incredibly disappointing," Mr Sevior said, adding that Mr Goyder "would have had some sense of when he was going" and should have left the decision on such a significant investment for whoever replaced him as chief executive.

“I think they’ve really hamstrung [new CEO] Rob Scott’s capacity to pursue any ideas, if he had any, because he’s probably spending a disproportionate amount of his time dealing with [BUKI] problems."

The prominent fund manager has previously called for Wesfarmers to spin out Bunnings as a separate business, which he said could be worth $20 billion on its own versus Wesfarmers' $46 billion market value.

Wesfarmers shares fell 2.75 per cent to close at $41. They have now fallen 7.1 per cent since Monday.

'Worse than Masters'

Analysts were just as scathing in their assessment of the BUKI business, with Deutsche Bank's Michael Simotas saying it now looked worse than the Masters Home Improvement disaster that plagued Westfarmers' arch-rival Woolworths for years.

He said the market had only been given confidence in the BUKI project because of Bunnings management's strong track record and that the profitable Homebase business would provide cash flow while stores were converted to the Bunnings format.

"Post the departure of the executives who did the deal, and with the once profitable Homebase deeply loss making, the outlook has deteriorated sharply," Mr Simotas said.

"We believe it is now appropriate to compare BUKI to Woolworths' failed Masters venture but in many ways BUKI looks worse".

Mr Simotas said Wesfarmers was in a worse position than Woolworths was in with Masters becasue it was stuck with a $1.8 million lease liability, whereas Woolworths had its Masters property portfolio to sell.

Unlike Woolworths, which had a tie-up with Lowes, Wesfarmers had no joint-venture partner to share the financial pain with, unlike Woolworths' tie-up with Lowes, he said.

Mr Simotas said Wesfarmers was also was running up losses set to dive deeper than anything Masters inflicted on Woolworths.

Shaun Cousins from J.P Morgan also said that Wesfarmers' losses could now exceed those suffered by Woolworths shareholders due to Masters, and that it must consider an exit despite the significant cost and redo its due diligence of the project.

The drastic writedown did show however that Wesfarmers' new senior management led by Mr Scott and CFO Anthony Gianotti was willing to take decisive action on headaches, however.

"There should be some comfort from these actions that underperformance will not be tolerated," Mr Cousins said.

Credit Suisse analyst Grant Saligari said Wesfarmers faced either "a prolonged period of losses or an embarrassing exit", and estimated either would cost the company $2 billion, or about 4 per cent of its market value.